1 IN THE SUPREME COURT OF THE UNITED STATES. 2 x 3 FIFTH THIRD BANCORP, ET AL., : 4 Petitioners : No v. : 6 JOHN DUDENHOEFFER, ET AL.

Transcription

1 1 IN THE SUPREME COURT OF THE UNITED STATES 1 2 x 3 FIFTH THIRD BANCORP, ET AL., : 4 Petitioners : No v. : 6 JOHN DUDENHOEFFER, ET AL. : 7 x 8 Washington, D.C. 9 Wednesday, April 2, The above entitled matter came on for oral 12 argument before the Supreme Court of the United States 13 at 10:29 a.m. 14 APPEARANCES: 15 ROBERT A. LONG, JR., ESQ., Washington, D.C.; on behalf 16 of Petitioners. 17 RONALD MANN, ESQ., New York, N.Y.; on behalf of 18 Respondents. 19 EDWIN S. KNEEDLER, ESQ., Deputy Solicitor General, 20 Department of Justice, Washington, D.C.; on behalf of 21 the United States, as amicus curiae, supporting 22 Respondents

2 1 C O N T E N T S 2 2 ORAL ARGUMENT OF PAGE 3 ROBERT A. LONG, JR., ESQ. 4 On behalf of the Petitioners 3 5 ORAL ARGUMENT OF 6 RONALD MANN, ESQ. 7 On behalf of the Respondents 24 8 ORAL ARGUMENT OF 9 EDWIN S. KNEEDLER, ESQ. 10 On behalf of the United States, as 11 amicus curiae, supporting Respondents REBUTTAL ARGUMENT OF 13 ROBERT A. LONG, JR., ESQ. 14 On behalf of the Petitioners

3 1 P R O C E E D I N G S 3 2 (10:29 a.m.) 3 THE COURT: We'll hear argument this morning 4 in Case , Fifth Third Bancorp v. Dudenhoeffer. 5 Mr. Long. 6 ORAL ARGUMENT OF ROBERT A. LONG, JR. 7 ON BEHALF OF THE PETITIONERS 8 MR. LONG: Mr. Chief Justice, and may it 9 please the Court: 10 A fiduciary's decision to do exactly what an 11 employee stock ownership plan is designed to do and what 12 the plan requires by continuing to offer employer stock 13 as an investment option is presumptively prudent. 14 Statutory language, trust law, congressional policy, and 15 practical considerations all support this result. 16 JUSTICE KENNEDY: You you want us to say 17 that we have sort of a coach class trustee. We're all 18 traveling in coach class when we have an ESOP. Once 19 once we go down that road, how how do we define what 20 the duties of the trustee are? 21 MR. LONG: Well, we're not asking for a 22 coach class trustee. I mean, we're we're saying to 23 look at the statutory definition of the duty of prudence 24 in Section 1104(a)(1)(b), which says that the duty of 25 prudence must take into account the character and aims

4 1 of the enterprise. So when we talk about ESOPs, we're 4 2 talking about a pension plan of a very specific kind. 3 It is designed, the definition 4 JUSTICE SOTOMAYOR: This does this plan 5 didn't require you to invest solely in employer stock, 6 did it? 7 MR. LONG: This plan 8 JUSTICE SOTOMAYOR: It gave you the option 9 to do it and to go above the 10 percent. But it didn't 10 require you to buy only employer stock, did it? 11 MR. LONG: Well well, ERISA, the statute, 12 requires that an ESOP invest primarily in employer's 13 stock. This particular plan, like many plans, requires 14 that all of the assets in the ESOP be invested in 15 employer stock except the amount that needs to be in 16 cash for short term management requirements. So so 17 Congress both 18 JUSTICE SOTOMAYOR: Could you point to the 19 part of your plan that did that? Because I looked at it 20 and I didn't see the plan requiring 100 percent 21 investment. 22 MR. LONG: If Your Honor, if you look at 23 page 735 of the Joint Appendix, you'll find in in 24 part 3.3, it states, "However, in all events, the Fifth 25 Third stock fund as described shall be an investment

5 1 option." 5 2 And then if you look on 736 and then 3 continuing on to 737, it says that, "The funds shall be 4 invested primarily in Fifth Third stock." It says, "It 5 may also be invested in short term liquid investments to 6 the extent the administrator determines they are 7 desirable to accommodate expected short run liquidity 8 needs." 9 But then it says, "The trustee shall have no 10 discretionary authority to sell Fifth Third Bancorp 11 shares or refrain from acquiring additional Fifth Third 12 Bancorp shares with funds not held for short run 13 liquidity needs." 14 So we think that 15 JUSTICE SOTOMAYOR: You use the word 16 "primarily." There's an allegation here that you should 17 have stopped buying stock once you understood that there 18 was a serious condition in the company. That you've 19 breached your duty of loyalty, not of prudence. What do 20 you do with that allegation? 21 MR. LONG: Well, what we say is that these 22 duties again, we're not asking for coach class 23 duties. These are first class, if you will, duties, but 24 they have to be understood in the context of this 25 special kind of plan with special purposes. The the

6 1 purpose of an ESOP is to own company stock, to give the 6 2 employees a piece of the rock, an ownership interest in 3 the company. And so when when the issue is, as 4 you're as you're posing it, Justice Sotomayor, at 5 what point does a duty of prudence or a duty of loyalty, 6 either one, require the trustee to break the plans of 7 the term, deviate from the plan's 8 JUSTICE SOTOMAYOR: It doesn't say you have 9 to. It says "primarily." It doesn't say you have to 10 continue buying. 11 MR. LONG: Well, again, I mean, I I 12 quoted the language. As we read the plan, and I think 13 the government agrees with us on this, the the 14 instructions of the plan are to invest all the money in 15 Fifth Third stock except as needed for short term cash 16 requirements. 17 Now, there is the duty of prudence, and 18 we're not asking for a second class duty. But we think 19 in this context, given this special kind of plan, what 20 that duty means is can the purpose of this 21 JUSTICE GINSBURG: Mr. Long, there is no 22 presumption written into this statute. There is an 23 exception from the diversification requirements in ESOP. 24 The whole object is to buy the company's stock, and so 25 you don't need to diversify. But apart from that, the

7 1 statutory requirement on loyalty and prudence is 7 2 undiluted. And so I don't know where this presumption 3 comes from. It's not in the statute itself. 4 MR. LONG: Well well, we do think it 5 comes from the text of the statute. It comes from the 6 duty of prudence itself which looks to the character and 7 aims of the plan, and then in Section 1107(d)(6), an 8 ESOP is defined in ERISA to be a plan that's designed to 9 invest primarily in the employer's own stock. So we 10 think that defines the special character name of the 11 plans. Congress has also spoken to this in other 12 statutory enactments 13 JUSTICE KAGAN: Mr. Long 14 JUSTICE SCALIA: Section 1104 of ERISA, 15 which this this plan is not exempted from, says that 16 the fiduciaries must manage a plan, and I quote, "for 17 the exclusive purpose of providing benefits to 18 participants and their beneficiaries." Do you 19 acknowledge that that's binding on the 20 MR. LONG: It it is. And the government 21 adds the word "retirement" before benefits, and they say 22 an ESOP must be managed exclusively to provide 23 retirement benefits, but that 24 JUSTICE SCALIA: Well, I don't add that. 25 I'm just saying providing benefits. I mean, that's

8 1 that's 8 2 MR. LONG: Oh, yes. 3 JUSTICE SCALIA: that's quite different 4 from running a plan to to own stock in the company. 5 That's that's not the basic purpose of it. 6 MR. LONG: Well, well, but, 7 Justice Scalia, plans ERISA plans provide different 8 kinds of benefits. The pension plans themselves can 9 provide death benefits, hardship benefits, disability 10 benefits. So if the benefit is stock in the company, a 11 piece of the rock, you know, the duty of the fiduciary 12 is to manage that as best as it can be managed to 13 produce the largest benefit for the participants. But 14 it's but it's not to go back to your question to 15 say, well, you know, it looks like some other investment 16 would be a better investment this week or this month. 17 JUSTICE KENNEDY: Is there anything in the 18 trust law or the common law that allows us to define 19 benefits that way? 20 MR. LONG: Well, I mean, I don't think we're 21 asking for a special definition of benefits. We're just 22 saying that what this plan and trust law does say the 23 settlor has a great deal of leeway to define the the 24 benefits that are being provided. This is a particular 25 kind of benefit, though, that Congress not only

9 1 authorized, but has strongly encouraged. I mean, 9 2 employers are strongly encouraged to offer this benefit. 3 So to say that prudence or loyalty or or 4 any of these fiduciary duties requires a sort of 5 continuous monitoring of the company to see whether 6 this is no longer such a good investment. 7 JUSTICE SCALIA: You say the benefits 8 referred to in the providing benefits to 9 participants, and you're saying the benefits to 10 participants is their ownership of company stock, 11 including worthless company stock. 12 MR. LONG: Well well, no, not at all, 13 Justice Scalia. I mean, the the idea is that the 14 company stock is valuable, and the hope is 15 JUSTICE SCALIA: But when it ceases to be 16 valuable, it seems to me you're not. 17 MR. LONG: Well, and and we agree as 18 as every court of appeals has has held, that has 19 looked at this, all seven, that there there does come 20 a time when the purpose of the ESOP, of allowing the 21 employees to build an ownership stake in the company, 22 can no longer be realized because the company is in 23 serious peril, serious jeopardy. 24 JUSTICE KAGAN: But but there are 25 occasions, Mr. Long, outside of that very narrow

10 1 category of cases that you define in which the stock is 10 2 going to be way, way, way, overvalued relative to what 3 the fiduciaries know is the company's actual value. 4 Let's just say it the the market price is four 5 times more than the actual value, and the fiduciaries 6 know that because of inside information that they have. 7 It just sort of defies language to say that some a 8 prudent person would retain the investment in that kind 9 of wildly overvalued stock, doesn't it? 10 MR. LONG: Well, I mean, if I could take 11 that in several steps. I mean, that material 12 overvaluation standard, which no court has ever 13 accepted, we think, is unworkable. I mean, first of 14 all, before you get to the inside information, which I 15 think is the kernel of it that's left at the end, if you 16 have a stock that is traded on an active market, you 17 really can't tell the fiduciary, absent possibly inside 18 information, Well, you need to outsmart the market. 19 JUSTICE KAGAN: No. But I'm talking about a 20 case in which the fiduciary has inside information 21 that that that enables him to know that the stock 22 price is way overvalue in the actual value of the 23 company. 24 MR. LONG: But when you when you get to 25 that point of the analysis, and this is what all the

11 1 courts have recognized, you have to then bring in 11 2 securities law, and you have to recognize to trade on 3 that inside information would violate securities laws. 4 So prudence or loyalty cannot require a violation of 5 securities law. 6 So what what are the other options? You 7 could halt trading. That would not itself violate 8 securities law. But that could do great damage to the 9 participants if the company if the company's own ESOP 10 said, well, we think something is so wrong that we're 11 shutting down the 12 JUSTICE KAGAN: Well, I I suppose it 13 could, but a prudent manager might say that it would do 14 greater damage to the to the participants in the plan 15 to enable this misinformation to exist and to keep 16 putting to keep buying stock, to keep putting more 17 and more of their retirement investments into something 18 that is really overvalued. 19 MR. LONG: Well, I mean, our point is that 20 that public announcement, that the ESOP has stopped 21 allowing purchases of company stock, could cause a sort 22 of collapse in the stock price that would be terrible 23 for the participants, and saying that prudence requires 24 that is kind of risky gamble. 25 JUSTICE KAGAN: Well, you assume that

12 1 truthful information will out in the end, and is it 12 2 better to keep on putting more money into something that 3 is is you know, is really not a good investment 4 for the participants and the beneficiaries? 5 MR. LONG: Well, but but by you know, 6 stopping immediately it could cause even greater harm. 7 But let I think your initial question 8 JUSTICE SOTOMAYOR: So what's wrong with 9 following the law and disclosing that material 10 information to the public and stopping the the 11 employees from losing more money in worthless stock 12 MR. LONG: And I think that's ultimate 13 JUSTICE SOTOMAYOR: or almost worthless 14 stock? 15 MR. LONG: That's ultimately where the 16 government comes in. Now, we've moved a huge distance 17 from let's, you know, shut down the ESOP to let's 18 release information. 19 But there we would say, again, we think you 20 have to consider this in connection with securities law 21 that if if you announce, well, there's this sort of 22 general duty to release information I mean, first of 23 all, that would be quite a big change in ERISA. 24 There's there are many specific requirements for 25 disclosure of information in ERISA.

13 1 And what the lower courts 13 2 JUSTICE KENNEDY: It's just background 3 information for this point you're discussing. Can 4 can you tell me, is it a very common practice for the 5 directors and officers of the company themselves to be 6 the trustees? I had just assumed that that didn't 7 happen much anymore. Can you just tell me, because a 8 lot of these problems would be taken care of, insider 9 information and so forth, if there was an outside 10 trustee. And I assume tell me if I'm wrong that 11 the reason for the trust for the company themselves 12 to do it is because it saves money. It's it's 13 cheaper than hiring an outside investment. Maybe I'm 14 wrong about that. But can you 15 MR. LONG: Well, in several 16 JUSTICE KENNEDY: Can you just tell us what 17 the what the landscape is? 18 MR. LONG: First first of all, it is 19 common. So this this happens quite a lot. 20 You know, second of all, this this idea 21 of, well, we could appoint an independent trustee, would 22 not really solve all the problems because then you'd 23 have to have a monitoring trustee who would have to give 24 the independent trustee any inside information that they 25 had.

14 1 So the government's suggestion is, well, 14 2 okay, you'd get a low level employee to be the 3 monitoring trustee. Well, that could itself violate 4 ERISA if you had somebody so low down that they wouldn't 5 know anything, that that also could be a violation. 6 So it's 7 CHIEF JUSTICE ROBERTS: I mean, part of 8 I'm sorry. If you want to 9 MR. LONG: So so it's it's really not 10 a solution, but it is common to have the officers of the 11 company, and I think it's not just to save money. It's 12 because it's a very important part of what the company 13 does, and they want to have their top people running it. 14 CHIEF JUSTICE ROBERTS: I mean, the dilemma 15 we're talking about, which is you've got inside 16 information and if you do something with it, it's going 17 to hurt the beneficiary, I mean, isn't that just a 18 reflection of the fact that these are really bad 19 investments? I mean, you're putting all your eggs in 20 one basket. Your your your job depends on the 21 company and your your retirement depends on the 22 company. 23 MR. LONG: Well 24 CHIEF JUSTICE ROBERTS: So that's why you're 25 in this awkward position of saying if the company is

15 1 doing something bad, you know, having inside inside 15 2 information that should be disclosed because it affects 3 the stock price, then it's going to hurt not only the 4 company, but also your retirement stock. 5 MR. LONG: Well, I mean, first of all, it's 6 quite right that an ESOP, because it's totally 7 undiversified, is not by itself a good retirement plan. 8 And we think that just confirms that the the special 9 nature and and aims of an ESOP is not solely for 10 retirement benefits. 11 JUSTICE GINSBURG: But it is it is a 12 purpose, Mr. Long, isn't it? You said you quoted the 13 statute, and the statute just says benefits. But isn't 14 the plan doesn't the plan itself mention retirement? 15 MR. LONG: Oh, yes. And and and the 16 hope, of course, is that these plans will produce lots 17 of retirement benefits. The third plan, for long 18 periods of its history, has been extremely successful at 19 producing retirement benefits. 20 Our our basic argument is, though, that 21 because of the nature of this plan, because it is linked 22 to the company's stock, and because Congress recently 23 looked at this exact issue after Enron and said, we want 24 employees to have choices, but company stock can still 25 be a choice and we actually encourage that

16 1 JUSTICE SCALIA: Well, the participants 16 2 MR. LONG: but you don't shut it down as 3 soon as there's trouble. If a company 4 JUSTICE SCALIA: Why do you need a special 5 rule for for ESOPs? I mean, the the factors that 6 you mentioned, it seems to me, apply to any trustee 7 who's managing. You say, oh, you should have sold 8 because the stock was overvalued on the on the stock 9 market. Well, how is the trustee supposed to know that? 10 MR. LONG: It's it's 11 JUSTICE SCALIA: Is he going to outguess the 12 market? 13 MR. LONG: Right. Absolutely. 14 JUSTICE SCALIA: Surely you don't demand 15 that a prudent trustee outguess the market. Okay? So 16 if it's not the market that's overvalued, it must be 17 inside knowledge 18 MR. LONG: Inside 19 JUSTICE SCALIA: that causes him to know. 20 MR. LONG: And I want to come 21 JUSTICE SCALIA: And you have the same 22 problem about not being able to use that inside 23 knowledge. 24 MR. LONG: You can't use it. 25 And let me come back to Justice

17 1 JUSTICE SCALIA: So so why do we need a 17 2 special rule for ESOPs I'm saying? All the points you 3 make apply to any any kind of trustee, whether it's 4 only company stock or not. Why do we need a special 5 rule for for company stock operations? 6 MR. LONG: Well, because if it were just an 7 ordinary investment 8 JUSTICE SCALIA: Right. 9 MR. LONG: where the purpose really is 10 just to maximize retirement benefits 11 JUSTICE SCALIA: Right. 12 MR. LONG: there you do look at the 13 risk return ratio and the expenses and all 14 JUSTICE SCALIA: No. But you have the 15 same the same the same problems that that you 16 justify doing nothing for the ESOP, justifies doing 17 nothing in the other in the other plans; namely, you 18 can't expect me to to outsmart the market, number 19 one, nor can you expect me to use my inside knowledge. 20 That violate the securities laws. 21 So those are your two points, but it seems 22 to me those points apply. We don't have to adopt a 23 special law for this. 24 MR. LONG: Well well, but, again, 25 Justice Scalia, we're we are agreeing with the lower

18 1 courts. There is absolutely a duty of prudence, and we 18 2 don't deny that there would be a point when a prudent 3 ESOP fiduciary 4 JUSTICE KAGAN: But even in saying that, 5 Mr. Long, you have a category where you would say the 6 duty of prudence applies, and it's this category of 7 where the company is on the verge of collapse. 8 But even there, you would face the exact 9 same securities law problems that you're that you're 10 saying should preclude 11 MR. LONG: Well 12 JUSTICE KAGAN: the government's test. 13 Because there, too, you would have this kind of, I don't 14 know what to do, I'm between a rock and a hard place, 15 the securities laws prevent me from selling on inside 16 information. The same problems apply. 17 MR. LONG: Well, no. What what we're 18 saying is using public information, the chances that the 19 company is going to be able to provide employee 20 ownership for the long term may become so low that a 21 prudent fiduciary would decide to shut it down. 22 But I do I do want to answer your 23 question on inside information because I think that's 24 the nub of it, and you raised the point of, if the 25 fiduciary actually knows the inside information, don't

19 1 they have to do something, make it public We talked about the securities law problem 3 with trading on it. The government says, Well, just 4 just make it public. Just release it to the public. 5 There we think the problem is, first of all, 6 that that would create this new sort of general ERISA 7 duty to provide information when it's not spelled out in 8 ERISA as you know, which has very specific 9 requirements. But 10 JUSTICE SOTOMAYOR: That's not an ERISA 11 responsibility. It's an SEC responsibility. It's 10b 5 12 responsibility. Aren't you supposed to disclose any 13 information that a reasonable investor 14 MR. LONG: And and that's 15 JUSTICE SOTOMAYOR: would real 16 MR. LONG: that's really exactly our 17 point, Justice Sotomayor. This is if there's inside 18 information that has to be disclosed, the securities law 19 provides a complete legal regime for this. The 20 government even agrees that in terms of the timing of 21 disclosure, the SEC timing should govern. 22 JUSTICE SOTOMAYOR: So what's what's 23 wrong with a rule that simply says a fiduciary has to do 24 whatever it's possible to protect beneficiaries 25 within the bounds of the law?

20 1 MR. LONG: Well, it it 20 2 JUSTICE SOTOMAYOR: And so if the law 3 required you to disclose it, and you didn't, you've 4 breached your duty of prudence and of loyalty, because 5 you've protected the company 6 MR. LONG: Well 7 JUSTICE SOTOMAYOR: but not the 8 beneficiaries. 9 MR. LONG: It sounds good, but I think it 10 would create serious problems. I mean, you would have, 11 then, two sources of information about the company, the 12 ESOP fiduciary, which you would be saying would have an 13 independent duty to decide when it thinks there's been 14 some material misstatement or some inside information 15 and the company, which could create great confusion. 16 JUSTICE SOTOMAYOR: You you don't 17 you're you have an absolute duty to the beneficiary. 18 MR. LONG: Well, but but the I guess 19 the point is, Justice Sotomayor, from the the 20 fiduciary can say, Look, if there's been a securities 21 law violation about disclosure or material 22 misstatements, there's a securities law remedy for that, 23 and the plan participants will get that remedy. 24 JUSTICE KAGAN: Well, then, what if the 25 JUSTICE ALITO: In an ESOP in an ESOP,

21 21 1 can the fiduciary take into account the interests of the 2 participants as employees as opposed to their interests 3 as investors? It doesn't seem to me that those will 4 necessarily always be the same. And there may be 5 situations in which something that would be potentially 6 good for the participants as investors would be quite 7 bad for them as employees. 8 They want to keep their jobs. They want the 9 company to stay afloat. Can that properly be taken into 10 account, or is that outside of the bounds? 11 MR. LONG: I mean, I I don't think you 12 have to do that. I think you you know, you look at 13 the interest of the participants who are both employees 14 and participants in the plan, you know. So so I 15 don't think it's necessary to say, Well, we're not even 16 looking at them as participants in the plan. We're 17 looking at them only as employees. Are we think 18 JUSTICE ALITO: No, I'm not saying only as 19 employees, but I'm saying can you take that into account 20 at all? If you're in the situation where stopping 21 trade stopping purchases in company stock would be a 22 signal that would potentially trigger bankruptcy and 23 liquidation for the company, can that be taken into 24 account? 25 It might not be in the best interests if

22 1 the if the if these participants were simply 22 2 investors, it might be in their best interests to stop 3 buying the stock. But if taking that step would have 4 the consequences that I mentioned, it might be very much 5 not in their best interests as employees. 6 MR. LONG: Well, I mean, I think I'd say 7 that that would be one way to sort of work this out. 8 It that's another way of getting to the the bottom 9 line that we think is correct here, which is that an 10 ESOP is a special kind of pension plan, and the whole 11 nature of it is to own company stock. And therefore 12 JUSTICE KENNEDY: Well, how do you fine 13 define the standard or the duty that's responsive to 14 Justice Alito's concern? And I had the same problem. 15 Let's assume that trustees in a non ESOPs 16 plan have a duty to maximize returns and provide stable 17 investments. Is it somehow different when it's an ESOP? 18 MR. LONG: Yes, I I think it is. If 19 there's 20 JUSTICE KENNEDY: And if so, what is the 21 duty? 22 MR. LONG: The I think the 23 JUSTICE KENNEDY: How do you define it? 24 MR. LONG: I think the the duty is to 25 maximize the returns for this special kind of a vehicle,

23 1 which is a vehicle that owns stock in only one company, 23 2 the the employee's company, and for reasons that 3 this kind of goes to to Justice Alito's point but in 4 a different way for reasons that go beyond just the 5 returns. 6 It's it is because it is the the 7 employees' company. Congress thought it was beneficial 8 for many reasons to encourage employee ownership of 9 companies, and so you don't look to whether, you know, 10 this appears to be a bad investment as compared to a 11 mutual fund. 12 JUSTICE KENNEDY: Well, if I'm the trustee, 13 I don't know what my duty is based on your answer. I 14 don't know what I'm supposed to do. 15 MR. LONG: Well, I mean, the courts of 16 appeals have had a fairly uniform approach to this for 17 now almost 20 years, and it has it has not been 18 causing a great deal of of trouble. The approach 19 they've all been taking is that because of the special 20 nature of ESOPs and, you know, when the plan requires 21 that all the funds be invested in the ESOP at least, 22 that's what the fiduciary must do, and that is 23 presumptively prudent. 24 It's not necessarily prudent, and there 25 would be, you know the way we think the Courts have

24 1 best expressed it, if and they draw this from trust 24 2 law if the special aims of this plan, employee 3 ownership, can no longer reasonably be achieved, then 4 prudence requires the plan to be shut down. That is not 5 a bright line standard, but that is the standard 6 the courts have adopted. 7 I'd like to save the balance of my time, if 8 I may. 9 CHIEF JUSTICE ROBERTS: Thank you, Mr. Long. 10 Mr. Mann. 11 ORAL ARGUMENT OF RONALD MANN 12 ON BEHALF OF THE RESPONDENTS 13 MR. MANN: Thank you, Mr. Chief Justice, and 14 may it please the Court: 15 I think what I can most usefully do is talk 16 first about the question of the relevant benefits that 17 was raised by some of you, and then second address this 18 so called "rock and a hard place" problem which we think 19 is essentially a confession of disloyalty by my most 20 able opposing counsel. 21 First, the nature of the benefits in the 22 statute, the reference to benefits in 404(a)(2)(A) is 23 quite plain. It refers to the basic type of plan that's 24 covered by ERISA, which is an employee benefit plan as 25 defined in Section 1002 sub 3

25 1 JUSTICE GINSBURG: Mr. Mann, I think the 25 2 point that raised that the employee benefit 3 MR. MANN: Section 1002, Sub 3 describes 4 employee benefit plans, which are the subject of ERISA. 5 And there are two types of employee benefit plans as 6 defined in that section. There are plans that provide 7 welfare benefits and plans that provide pension 8 benefits. And I think there is no doubt that the 9 benefits that must be exclusive purpose of an ERISA plan 10 are those benefits that are required to be governed by 11 ERISA. 12 And I think we need to remember the grand 13 bargain of ERISA, reflection of the statute is, if 14 employees are going to provide these kinds of benefits, 15 the people that manage the retirement and welfare plans 16 must accept fiduciary duties. That's the bargain of 17 ERISA. If you are going to provide these kinds of 18 benefits, you have to accept fiduciary duties. 19 And the sole purpose of the plan under the 20 statute is to provide those benefits. 21 Now, I'd like to talk about this idea of 22 this "rock and a hard place" that was first raised by 23 Justice Kagan. 24 I think that the best way to think about 25 this is, essentially, what the petitioners are saying

26 1 is, if I decide to put myself in a position where I owe 26 2 duties to two different people, my employer on the one 3 hand and the beneficiaries of the plan, because I've put 4 myself in a conflicted situation, it's perfectly right 5 for me to just do nothing. 6 That's not the way it works. You can 7 imagine a lawyer that undertakes to represent two 8 clients with conflicting interests. If it comes to the 9 point where the interests are in conflict, well, the 10 lawyer has already made a mistake. The lawyer cannot 11 simply say, well, I choose to protect one client, not 12 the other. They have to be something, and they're going 13 to violate some 14 JUSTICE BREYER: I would say that well, 15 what the problem but can you give me any example of 16 any case? There may be so many you can't even give me 17 your best one. But trusts have been around for probably years. And can you give me an example of one where 19 a court said a trustee has breached its fiduciary 20 obligation because he failed to use inside information? 21 MR. MANN: Oh, no, I I think there 22 probably isn't such a case, but I would 23 JUSTICE BREYER: You think there is not such 24 a case? 25 MR. MANN: I think there probably is not

27 1 such a case. The court of appeal 27 2 JUSTICE BREYER: Fine. If there is not such 3 a case, what's the problem? Because what's the rock and 4 the hard place? 5 MR. MANN: Well, the 6 JUSTICE BREYER: The person has an 7 obligation to act prudently in respect to the 8 fiduciaries to the beneficiaries, of course. But he 9 cannot, irrespective of that, have an obligation to use 10 inside information. End of the matter. What what's 11 wrong with saying just that? 12 MR. MANN: I I'm not sure what you mean 13 by that, but I'd like to 14 JUSTICE BREYER: What I mean by it is just 15 what I said. There is no rule of trust or ERISA law 16 that you can breach a duty to a beneficiary by failing 17 to use inside information, period. I don't know what 18 the SEC's brief is. I'm going to ask 19 MR. MANN: I think I 20 JUSTICE BREYER: the SEC what their 21 opinion is because they don't seem to appear on this 22 brief. 23 MR. MANN: I think I would respectfully 24 disagree with that, and I think it's important to 25 understand why, Justice Breyer and Justice Kagan.

28 1 JUSTICE BREYER: The answer is there's not 28 2 been a case ever holding the contrary 3 MR. MANN: But that's 4 JUSTICE BREYER: but you yourself 5 disagree with it. 6 MR. MANN: But that is 7 JUSTICE BREYER: Now, what the reason you 8 disagree with it? 9 MR. MANN: That is because the courts of 10 appeals unanimously, as Mr. Long says, have held that 11 the trustees of these plans have no duties at all. And 12 so if trustees have no duties at all, it's of course 13 quite difficult for them to breach the duties. Now, 14 my 15 JUSTICE BREYER: I'm sorry. I'm saying go 16 back to England. There are many cases where settlors 17 have said what kinds of things you should invest in, and 18 they invest in them. They have inside information that 19 it is a bad investment. Is there any case that says 20 they have a duty of obligation not to do what the 21 settlor says? I wouldn't have been surprised if you had 22 found some cases, but I'm also not surprised that there 23 aren't any. That's why I asked the question. 24 MR. MANN: With respect to that particular 25 question, and I I did not understand your question

29 29 1 that way, and I don't I can't say whether there is or 2 has never been such a case. 3 But what's important from our perspective is 4 the trustees in this case undertook to represent 5 conflicting interests. Ordinarily when people undertake 6 to represent conflicting interests 7 JUSTICE SOTOMAYOR: Let me just continue to 8 Justice Breyer's question. There are some legal duties. 9 I don't know of a trustee who has to break the law. 10 They can't sell on the basis of inside information, and 11 that's a legal prohibition. 12 MR. MANN: I think that's clearly true, but 13 I think they, at the same time, at their peril, breach 14 their duties of loyalty to those for whom they've 15 accepted a fiduciary duty. And the 16 JUSTICE SOTOMAYOR: So your claim rises and 17 falls on the fact that you think they're they've 18 breached their duty of loyalty by having the inside 19 information and or exactly what is your claim? What 20 could they have done that wouldn't breach the law? 21 MR. MANN: My claim does not rise or fall at 22 all on that. And I don't think there is any reason why 23 you need to address that, given the particular nature of 24 the complaint. The complaint in this case alleges that 25 the trustees knew or would have known, if they had

30 1 undertaken a reasonable investigation of the type that 30 2 is required by ordinary principles of prudence, that the 3 stock was materially overvalued, and the stock was a 4 much more risky investment than it was at the time that 5 the plan was designed. 6 JUSTICE SOTOMAYOR: How would they 7 JUSTICE ALITO: What do they have to do 8 then? You said they can't sell the stock based on that 9 information. What are they supposed to do? Or is it 10 your argument that they just never you never should 11 have insiders serving as trustees; you always have to 12 have an outside running these ESOPs? 13 MR. MANN: Well, I wouldn't say that you 14 always have to, but I do think that the situation is 15 quite parallel to the situation that corporate directors 16 face when they come into a conflicted situation. In the 17 corporate context where directors ordinarily are 18 protected by the business judgment rule, if a situation 19 arises in which their interests patently diverge from 20 the interests of the shareholders, they don't simply 21 decide to represent both interests but pick one over the 22 other. They instead step aside and appoint and, you 23 know, allow independent people to represent the 24 shareholders. 25 JUSTICE ALITO: So you're basically saying

31 1 that if it's not flatly prohibited, it is very unwise It generally shouldn't happen. You're putting yourself 3 in an impossible position if you are an insider and 4 you're going to serve as a trustee of an ESOP. 5 MR. MANN: Well, I think it's a plain 6 implication of Justice Kennedy's opinion in Glenn and 7 the majority opinion in Glenn that the structure of the 8 fiduciary and the relationship to the trust being 9 conflicted should raise a red flag. 10 JUSTICE BREYER: Here when you say I am 11 totally with you on this. We walk into the trustee's 12 office. It's like Ralph Nader investigating the FTC 13 years ago. There is someone asleep on the sofa. In his 14 inbox is ten feet of papers telling him about all 15 public telling him about the corporation's condition. 16 It's apparent he's never read them. If he had read 17 them, he would have taken action. Of course you would 18 have a case, I would think. 19 MR. MANN: But that is our complaint. 20 JUSTICE BREYER: But you want to go beyond 21 that? 22 MR. MANN: No. Our complaint is they have 23 the information in step one. They didn't do anything. 24 Step one, they did not 25 JUSTICE BREYER: Not just information.

32 1 Remember I carefully said all this was publicly 32 2 available information. You want to say it also applies 3 when it's not publicly available information. Am I 4 right or wrong? 5 MR. MANN: You are correct. I would like to 6 say that, but I would like to point out our complaint 7 alleges a large amount of information that is one, 8 public; two, false information promulgated by the 9 petitioners, the falsity of which perhaps could have 10 been undertaken by discovered by considerable 11 investigation. 12 And instead of conducting a reasonable 13 investigation that a trustee for a billion dollar 14 pension plan ordinarily would conduct and just to be 15 clear for the earlier discussion, this is not a plan 16 that is invested solely in Fifth Third stock. This plan 17 has a variety of investments. There is one particular 18 fund that has 1 to $200 million 19 JUSTICE KENNEDY: Suppose you were a 20 legislature or a congressman. You are absolutely 21 committed to the idea that it's important and salutary 22 to have employees own stock in the company for which 23 they work. How would you write the statute? 24 MR. MANN: I think Congress has done a great 25 job of writing the statute. Congress has wrote a

33 33 1 statute that tells employers you can set up these plans, 2 and the trustees don't have to diversify, which is 3 inherent in having a plan that has employee stock 4 JUSTICE KENNEDY: Well, once you say the 5 trustee doesn't have the duty to diversify, it seems to 6 me you are living in something of a different world. 7 MR. MANN: I think that's right. And that's 8 why we believe that this standard of prudence is 9 affected by the fact that it's an employee stock 10 ownership plan rather than just a portion of the fund 11 that owes employers' stock. But that doesn't mean that 12 there's no duty of loyalty. It shouldn't affect that at 13 all. 14 CHIEF JUSTICE ROBERTS: Well, but affected 15 is not quite enough. I mean, this trustee's job is to 16 buy the company's stock. In that particular fund, it's percent, other than the money you need to buy and 18 sell. So he has the easiest job in the world. He gets 19 up in the morning and says, "I think I will buy some of 20 this company's stock." 21 (Laughter.) 22 CHIEF JUSTICE ROBERTS: That's what he's 23 supposed to do. And I think that what every Court of 24 Appeals has recognized is that that is by definition 25 prudent, because that is the settlor's objective with

34 1 one exception. If everything is going, you know, south 34 2 and the company's collapsing, well, then he does have 3 the obligation to do something. 4 So I don't understand how you keep can 5 say that he has breached a fiduciary duty of prudence 6 when the people investing in this ought to know what 7 they're going to get is the company's stock. 8 MR. MANN: I think it's I'm glad that you 9 asked that question, because I think that's central at 10 the disagreement between respondents and petitioners. 11 Now, the first answer, of course, is that 12 you can't look at the statute without thinking that 13 Congress had a different understanding of the duties. 14 And if I just could just mention a couple of things 15 about the statute. It's not only the point that Justice 16 Scalia made that Section 404(a)(2) specifically carves 17 out some duties but not others. 18 It's also that it only forgives prudence to 19 the extent of diversification, which means that prudence 20 has to mean something other than diversification. And 21 then it still further limits the scope of forgiveness. 22 It only forgives it with respect to the acquisition or 23 holding of qualifying employee securities employer 24 securities, which is much narrower than the fiduciary 25 duty defined in Section 403 to manage and control the

35 1 assets of the plan But what's important for our purposes, it 3 would not if you ask the question, although the 4 statute resolves it, it would not have been sensible for 5 Congress to tell the people that manage employer stock 6 ownership plans that they have no duties of prudence or 7 loyalty to the employers whose retirement funds are at 8 stake. 9 CHIEF JUSTICE ROBERTS: Well, what is 10 exactly the duty of prudence? Presumably, you buy 11 you invest the funds in the company's stock, whether 12 it's going up or going down, right? If you have the 13 funds, all you can do is invest them. The stock is down 14 half a point or whatever. You still buy it, right? 15 MR. MANN: Okay. So I'd like to say, first, 16 there is the duty of loyalty. And it does breach the 17 duty of loyalty, for example, as the Court said in 18 Varity, and I don't think it's controversial, to lie to 19 the beneficiaries. 20 CHIEF JUSTICE ROBERTS: Well, what's the 21 answer to my question? 22 MR. MANN: With respect to the duty so 23 the duty of loyalty is enough to sustain 24 CHIEF JUSTICE ROBERTS: No, no. I didn't 25 ask a question about the duty of loyalty.

36 1 MR. MANN: With respect to 36 2 CHIEF JUSTICE ROBERTS: I asked a question 3 of whether or not the trustee is imprudent because he 4 buys the stock because it's gone down you know, gone 5 down 10 percent. 6 MR. MANN: Okay. The most fundamental thing 7 about the duty of prudence that you would get from your 8 statement of trust is that the outcome of the investment 9 is not what's relevant. What's relevant is, and Justice 10 Scalia when he was on the D.C. Circuit that wrote a long 11 opinion in Fink, which discusses in detail, and you'd 12 see the same thing in the comments to Section 90 of the 13 restatement, the most important thing is what you might 14 call procedural prudence. Okay. These people are 15 managing a fund of $1 billion. The relevant question is 16 what would a reasonable trustee of a billion dollar fund 17 have done to investigate the situation? Would someone 18 with a billion dollar fund and 100 to $200 million of 19 Fifth Third stock have routinely been collecting 20 information about the nature of that investment, whether 21 they should take some action? 22 It well might be it well might be that 23 they should not in a flighty or haphazard way dispose of 24 the stock, because that's the baseline of this plan, is 25 to invest in the stock. But that's entirely different

37 37 1 from doing absolutely nothing, not telling the employers 2 information 3 JUSTICE ALITO: Do you think the trustee has 4 a duty to acquire inside information? The trustees say, 5 I don't want to know insider information. I'm going to 6 put myself in exactly the position of an outside 7 trustee, so I'm going to take into account only public 8 information, I'm not going to do an investigation. 9 MR. MANN: Our position is that the duty of 10 the trustee is to behave as a prudent fiduciary would 11 behave, and if the trustee is unable to do that because 12 the trustee has conflicting interests to serve, then the 13 trustee is violating the duty of loyalty and should 14 arrange the situation differently. 15 JUSTICE ALITO: What's the answer to my 16 question? Assuming that 17 MR. MANN: The answer to your question 18 JUSTICE ALITO: permissible for an 19 insider to be in this position, can the insider behave 20 like an outsider? 21 MR. MANN: I think it's plain in the case 22 that if the trustee does not undertake the investigation 23 that a prudent fiduciary would take, because of their 24 concern about acquiring insider information of the 25 employer, then they would violate the ordinary standard

38 1 of prudence CHIEF JUSTICE ROBERTS: Well, can we talk 3 concretely instead of just saying, well, they've got to 4 do what a prudent fiduciary can do? Are they allowed to 5 take into account the impact of a decision to stop 6 buying on the beneficiaries? The stock is going down, 7 if the trustee stops buying, that's going to cause a 8 drop in the value of the shares and that's going to hurt 9 the beneficiaries. So what does he do? Does he say, I 10 shouldn't buy any more because I think it's going to go 11 down some more? Or should he say, I should keep buying 12 because otherwise all of the holdings, and this is all 13 they are invested in, their holdings are going to go 14 down? 15 MR. MANN: I think the obligation of the 16 fiduciary at all times is to behave prudently in 17 managing investment prudently. There might 18 CHIEF JUSTICE ROBERTS: I asked for an 19 answer to the question. And I it doesn't it's not 20 going to help me to have this mantra as opposed to 21 MR. MANN: Well, I don't I don't believe 22 that the question is whether they must sell or mustn't 23 sell. I think they have to decide would it be in the 24 based on the facts we know right now, do we believe that 25 this is a short term blip in the stocks and it will rise

39 1 back up, in which case, we 39 2 JUSTICE BREYER: In a way, what happens is 3 that the trustee, knowing that the company has announced 4 an enormous oil strike, is having to sit on a private 5 meeting where three people come in and you say, yeah, 6 there was an oil strike, but it's impossible to get the 7 oil out. Ha, ha, we put one over on that time. Okay. 8 MR. MANN: If the 9 JUSTICE BREYER: Now, what's that trustee 10 supposed to do? 11 MR. MANN: I think I lost track of whether 12 the oil strike was true or false. 13 JUSTICE BREYER: No. There's a false. 14 MR. MANN: Okay. 15 JUSTICE BREYER: He alone, when two other 16 people, know that this oil is worthless. The market 17 doesn't. It's totally inside information. What, in 18 your opinion, is he supposed to do? 19 MR. MANN: I believe that the trustee 20 violates the duty of loyalty and the duty of prudence if 21 the trustee, believing that the stock is overvalued, in 22 fact, does not take action to protect the beneficiaries. 23 JUSTICE BREYER: Okay. So your answer is, 24 totally inside information, he sells, right? 25 MR. MANN: I didn't say that. I think he

40 1 needs to do something (Laughter.) 3 JUSTICE KENNEDY: I just don't see what the 4 trustee is supposed to do. You have the company stock. 5 By comparing it with other stocks, there will be many 6 investments that are just as good or better. When does 7 he have to make the investment, in other words, just as 8 good or better? I don't understand. I don't understand 9 what how we're going to implement what Congress 10 wanted to implement. 11 MR. MANN: Well, we believe that the 12 traditional fiduciary standard is not that hard to 13 implement. It's a standard that's been imposed on 14 fiduciaries for centuries. It's a standard that all 15 managers of trusts have undertaken. The only thing 16 that's really different about these particular trustees 17 is that they're managing funds that are worth, you know, 18 billions of dollars. 19 JUSTICE GINSBURG: You said you were going 20 to deal with the rock and a hard place. But if the 21 trustee goes out and sells, that would be a signal that 22 things are bad with the company. So it will end up 23 being worse for the beneficiaries of the plan. 24 MR. MANN: We certainly believe that if the 25 trustee's view, based on the information, is that

41 1 selling the stock would be bad for the beneficiaries, 41 2 then a decision not to sell is prudent. If the trustee 3 decides selling would be bad for the beneficiaries so 4 we're not going to sell, that is a prudent decision. It 5 might be right. It might be wrong. But if that's their 6 decision, I think that's prudent. If a trustee decides 7 selling would be beneficial to the beneficiaries, it 8 might be right, it might be wrong, but if that's what 9 they actively decide, then I think they need to do 10 something. And that's our position. 11 Now, the rock and the hard place, I 12 understand that some of the Justices have disagreed. 13 But I mean, our position on that is quite clear. The 14 only reason petitioners are between a rock and a hard 15 place is they have undertaken to have interests that 16 directly conflict with their fiduciary obligation to 17 these employees' retirement benefits. There is nothing 18 in the statute. There is no practical consideration 19 that petitioners have suggested. There is no reason 20 that these funds need to be managed by insiders. As far 21 as we 22 JUSTICE GINSBURG: But beyond the outside 23 trustees, they have to get information from the insider 24 and we're back in the same place. 25 MR. MANN: Well, of course, if you wait

42 1 until you are in possession of information and you know 42 2 the stock is overvalued, you can't solve the problem by 3 stepping aside then. But if you set up the trust in the 4 hands of an independent investment manager in the 5 beginning, we believe that if you look carefully to 6 provisions of Section 1105(c) and (d), you will see that 7 Congress has provided a great deal of protection for the 8 person it appoints. Of course, it's true that if the 9 person in the company that appoints a fiduciary knows 10 that there is a breach of fiduciary duty by the 11 investment manager, they're still liable. But what else 12 could Congress possibly say? Congress couldn't write a 13 statute that says people that knowingly breach fiduciary 14 duties of the employees are not supposed to be liable, 15 so 16 CHIEF JUSTICE ROBERTS: The status of the 17 trustee, whether it's an interested party or a 18 disinterested fiduciary, is disclosed to the 19 beneficiaries, I take it, at the outset? They can 20 decide that they don't want to invest in that particular 21 fund and there are nine other options because of that 22 potential conflict? 23 MR. MANN: Yes, they are advised of that. 24 Their ability not to invest in that particular fund is 25 limited during the class period because all of the

43 1 matching contributions for all of the class period went 43 2 directly into this fund. So employees would have to 3 take that active step to remove them from the fund. 4 CHIEF JUSTICE ROBERTS: If they wanted 5 but hopefully, they got four percent matching funds if 6 they were in that fund? 7 MR. MANN: That is correct. 8 I think the most important thing for us to 9 emphasize is the point of ERISA is that if an employer 10 is going to provide employee benefits, the people that 11 manage those benefits have to accept fiduciary duties. 12 There is nothing unusual about that. The standard is 13 not unworkable. It's a standard that is provided for 14 centuries. And if the only reason that the people 15 managing the fund can't comply with those duties is 16 because they have obligations to the employers, then 17 that is not something that ERISA can tolerate. 18 Thank you. 19 CHIEF JUSTICE ROBERTS: Thank you, counsel. 20 Mr. Kneedler. 21 ORAL ARGUMENT OF EDWIN S. KNEEDLER 22 ON BEHALF OF THE UNITED STATES, 23 AS AMICUS CURIAE, SUPPORTING RESPONDENTS 24 MR. KNEEDLER: Mr. Chief Justice, and may it 25 please the Court: